A Glut of Cement: Will Export be a Solution to Supply Side Boom?
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With the inauguration of Ethiopia’s largest cement plant, Derba Midroc Cement PLC in February 2012 and the expansion of Mugher and Messebo Cement Factories, the hyper- inflated cement market entered into a cutthroat price competition. Although the price of cement decreased from an average of more than 400 Birr a quintal to 160 at factories’ gate, the oversupply and saturation of the domestic market is pushing cement manufacturers to look for foreign markets. Since 60Pct of the cost of cement production goes to energy, which is largely generated from coal; it’s becoming evident that competing in the international market would only be feasible when energy-related constraints are resolved. EBR’s Samson Hailu explores the complex issue.

When the two largest cement factories in Ethiopia, Mugher Cement Enterprise and Messebo Cement Factory, decided to upgrade their capacity by nearly 100Pct in 2009, it was looked upon favourably by industry insiders. Many said it was the right move towards narrowing the demand and supply gap in the cement sector. The decision to upgrade capacity was also driven by the need for each company to maintain their respective market share in the country.

The expansion projects, which were completed within two years, were considered to be milestones by many in the industry. The completion of the projects was also a relief for the government, which had been trying to attract more investment in order to increase cement supply for many of public projects. The late Prime Minister Meles Zenawi’s attendance of the inauguration ceremony of Messebo’s expansion project, which increased the factory’s capacity to 2.1 million tons a year, indicated how important these expansion projects were. Through similar expansion efforts, on the other hand, Mugher managed to double its annual capacity to 2.2 million tons. Together, the projects borrowed nearly four billion Birr from the Development Bank of Ethiopia.

The expansion projects were undertaken in an attempt to reap benefits from the rising demand from many construction projects in the public and private sector. In Ethiopia, demand for cement has almost always surpassed supply, which has resulted in steadily increasing prices since 2006. In 2008/09 fiscal year, the 10 operational cement factories in Ethiopia were only producing three million tons a year.

The demand for cement has been increasing by 25Pct annually, according to an annual report by the Ministry of Trade. At the time Mugher and Messebo began their expansion projects, industry insiders simply hoped to meet national demand. However, much to everyone’s surprise, after the two factories inaugurated their expansion projects, the cement market is no longer there. The gap between supply and demand no longer existed; instead, diminishing demand and rising supply became the norm within the industry

The U-Turn

The sudden change in the cement market was the result of a supply surge when major expansion projects, similar to that of Mugher and Messebo, were undertaken by other cement factories. One such factory, the National Cement Share Company, increased its capacity to produce 1.2 million tons annually. Yet the biggest shake up in the sector came when Derba MIDROC Cement, owned by the Business Tycoon Mohammed Hussein Ali Al-Amoudi, was officially inaugurated. In February 2012, Derba, the largest cement factory in the country, was inaugurated in the presence of the late prime minister. The factory has the capacity to produce 2.3 million tons annually.

Before even putting their product on the market, Derba launched an aggressive marketing campaign, something no other cement factories in Ethiopia had done before. They also offered competitive prices: 170 Birr per quintal, compared to over 500 Birr other providers were charging. Derba also offered a 60-day credit facility for buyers who advance 50Pct of their purchase up front. Even better, the managers of Derba promised to deliver cement to their clients within a 600Km radius of Addis Ababa. All these offers were enough for Derba to penetrate into the cement market easily.

Once Derba’s product entered the market, a sudden drop in demand of cement from other factories seemed inevitable. Although cement factories preferred to sell locally, it was almost impossible to sell their products in the local market; this, even after the reduction of their cement price from 500 Birr a quintal to 225 Birr on average, due to the competition that existed after Derba entered the market.

Name of the factory

Annual production capacity (In Million Tons)

Derba Midroc Cement

2.3

Mugher Cement Enterprise

2.2

Messebo Cement Factory

2.1

National Cement S.C.

1.2

When Derba first began production, the demand for cement was already in the middle of a decline, according to Jemal Ali, a cement retailer with 15 years of experience, told EBR. However, the demand for cement products has been gradually rising. “Retailers, who used to sell only 25 - 35 quintals a day previously, now sell as much as 100 quintals,” Jemal said.

One of the reasons for the current rise of demand for cement is the increase of government funds for construction projects, according to Belay Haile, an industrial engineer and former operation manager of Dire Dawa Cement Factory.

However, according to Mekonnen Zergaw, CEO of Mugher Cement Factory, the demand won’t last too long: “Seasonal demand increment will not bring a sustainable solution to the bulky problem. Most of the time cement factories function below their capacity due to lack of demand” he told EBR.

Mugher currently produces around 3,000 tons of cement per day, which is half of its capacity. The experience of other factories is similar. Kebede Engida, head of the production department at National Cement also agrees that the industries are not utilizing their full capacities. “We are producing below the factory’s capacity. Currently, National Cement [utilizes] close to 60Pct of its capacity,” he told EBR. A drop in construction activity has caused factories to produce under capacity, according to Melaku Taye, spokesman at the Ministry of Industry (MoI).

For most of the cement factories, the real demand is not coming from the private sector. It is rather coming from huge public projects like Gil Gel Gibe III and Renaissance Dam projects that are currently buying from Mugher and National cement.

For Derba’s product’s, demand from the private sector is better than the others. The entrance of Derba and that of supply increment led to a flurry of purchases by contractors like Kebede Taye, general manager of a construction company: “I switched to Derba’s product because of its price and on-time delivery.” Derba is also affected by the saturation of the market, according to Misrak Tadesse, marketing officer of Derba Cement. “Although we sell at such a low price, we constantly find ourselves struggling to sell what we produce,” he says. Currently, Derba operates at nearly 2/3rd of its capacity.

To make matters worse, the surplus supply of cement continues to overpass demand at higher rate. This clearly shows the challenge faced by cement factories. Although the estimated cement demand for 2012/13 was 13.8 million tons, the actual demand turned out to be 8 million tons. In the 2013/14 fiscal year, Ethiopia’s annual cement output capacity has reached 12.12 million tons, more than double the local demand.

However, demand is picking up in the country. In 2012, the Ministry of Industry established a committee, in collaboration with the Ministry of Urban Development, Housing and Construction, the Ministry of Trade and Ethiopian Roads Authority in order to find ways of increasing demand for cement. Atsbeha Gebreyohannes, a member of the committee and head of the Housing Development and Construction directorate says they plan to do this by promoting “the construction of asphalt concrete roads” and that “the construction of condominium houses in Addis Ababa is expected to uplift the demand.”

Cement supply increased significantly after several new factories began production during the past few years. Currently, there are 18 factories engaged in cement production in Ethiopia. For the government, this is an important step towards increasing the national cement production to 27 million tons in order to meet the goals set by the Growth and Transformation Plan (GTP), which ends in June 2015. For cement factories, however, it means continuing their hunt for alternative markets in neighbouring countries.

Export Panacea

Mugher and Messebo were the first companies to request export permits from the Ministry of Trade (MoT) when demand for their product shrank in 2012. Gradually, other factories followed, including National Cement.

Only senior managers of Messebo and Mugher have experience in the international market. In 2005/06, both factories exported 10,000 tons of cement to Sudan. Based on that experience, they learned that it is better to sell locally rather than export their products, as the international market offers less than what the domestic market currently offers. “From our previous experience we knew that it will be difficult to compete with other cement manufacturers in [the] East Africa region,” Muger’s CEO told EBR. Low demand for Ethiopian cement in neighbouring countries, coupled with long transportation routes are major problems facing exporters. “It takes more than seven days to deliver their first consignment to the agreed destination. Unfortunately it was the only way out to unload the surplus cement,” Muger’s CEO added.

In 2012/13 fiscal year alone, nine cement factories including Mugher, Messebo and National Cement exported a little over 24,000 tons of cement to Kenya, Puntland, Somaliland and South Sudan, according to data obtained from the Ethiopian Revenues and Customs Authority. In return, these factories earned close to USD2.7 million. Derba Cement has also been exporting its product to Kenya for the Ethio-Kenya Highway Construction. So far it has earned USD1.5 million.

The rising cost of production in Ethiopia is a major obstacle for many cement factories who are looking to penetrate the foreign markets by offering competitive prices. Since cement industry is an energy-intensive sector, all major operations of cement manufacturing critically hinge on the availability of power. “But due to [the] limited electric power supply in the country, factories [have] been incurring [a] huge amount of money to substitute electricity,” Belay, who manages his own consulting firm told EBR. The additional cost, according to him, is making local cement manufacturers’ uncompetitive in the international market.

All cement manufacturing plants used to get their power supply from the former Ethiopian Electric Power Corporation. However, the supply has been inconsistent, forcing them to replace it with heavy fuel oil. In 2008/09, the Corporation even instructed the nation’s two largest cement plants to close for a month due to a severe power shortage.

Though one of the reasons for increasing prices of cement is the profit motive of the factories, a rise in production costs, especially due to expensive fuels, is a major factor that determines the price of cement in Ethiopia. The Ministry of Industry estimates that, out of the total cost of cement production, fuel accounts for 60Pct of the total cost of production. Though product differentiation in the cement sector is very low due to the existence of a mature technology and use of similar inputs, pricing decisions among firms along with cost advantages play a critical role in the sector.

However, experts advise that although firms in a monopolistic market structure have less competition, they still can increase profits by developing new products and lowering their costs. In Ethiopia, due to a weak price elasticity of demand for cement, companies engaged in cement production spend less on research and development, indicating a lower level of competitive pressure within the market.

By the end of 2010/11 fiscal year, the government decided to fully shift the energy source of cement factories from being dependent on the use of electric power, which is unreliable and high fuel oil that involve foreign currency spending, to that of coal, which is relatively cheaper.

The Way-out

Maintaining continuous coal supply is difficult since global coal production is slowing down due to high production cost and low demand from major industrialized countries such as China. Many countries are now replacing coal in order to abide international agreements put in place to reduce air pollution. The annual demand of coal for cement factories is estimated to be 173.4 million tons, according to an assessment the Ethiopian Petroleum Supply Enterprise carried out in 2011. Considering the current international price for coal, the country has to spend close to USD100 million each year. This amount is estimated to increase in the future due to high production cost of coal, according to experts. Therefore, the only available solution to be competitive internationally would to find the resource in Ethiopia or generate enough electric energy, experts recommend.

Although Ethiopia has a reserve of 70 million tons, the coal contains high levels of ash and low caloric value, which means that it has low capacity to generate energy. However, the Ethiopian Geological Survey is currently exploring coal reserves in Illubabur and North Shoa, located in Oromia and Amhara regions, respectively, which are believed to contain a coal reserve amounting to 1,628 metric tons.

In the meantime, with this limited energy supply, close to 10 new cement companies -- including Nigerian conglomerate, Dangote Group and the local Habesha Cement -- are expected to join the market in the near future. This poses an even larger threat for the existing cement factories that are producing below their capacity. According to industry insiders and experts, finding a cheap power supply is the only sustainable solution for the Ethiopia’s cement sector, which is trying to be competitive in both the local and international markets.

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